Does Sterling Still Matter for Monetary Policy?

Abstract

In this speech, Andrew Sentance, a member of the Monetary Policy Committee, discusses the recent fall in the value of sterling and its implications for monetary policy. He argues that the fall in sterling since mid-2007, particularly against the euro, reflects weaker prospects for UK domestic demand, increased perceptions of risk associated with sterling assets, and a growing belief that the sources of UK demand growth need to be rebalanced. With little evidence that a quick rebound is likely, the pound's weakness is likely to exacerbate short-term inflationary pressures as well as offsetting weakening demand. Significant moves in the external value of the pound can be important for monetary policy judgements, but need to be interpreted in the context of the overall balance of risks. In the current context, the response of wage growth to the upside risks to inflation expectations is a particularly important issue.